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Spend enough time on “Economist Twitter” and one is apt to come away feeling that economists and the related academics are remarkably comfortable with the fact that inflation remains elevated and they’re employing a variety of tactics in an effort to convince folks that everything is OK.
Some rely heavily on the rate of inflation today not being as bad as it was in 2022 and parts of last year. While true, that ignores the points that price increase are still occurring and they’re building off 2022 surges that were among the highest in four decades. Others exclude everyday essentials – food, gas, shelter and the like – to formulate a flawed thesis that inflation is nonexistent.
Compounding those woes is the cohort of economists and academics dwelling on social media that are using flawed, opaque economic gauges to defend inflation as virtuous and beneficial, ignoring the harm inflation and high interest rates have caused or both.
Indeed, inflation and the rate tightening deployed by the Federal Reserve to fight it have had consequences, plenty of which are dire. Those include unnecessary punishment inflicted upon retirement portfolios. If there is a silver lining, it’s that pre-retirees and retirees themselves know that they need an advisor to help navigate this perilous inflationary environment.
Inflation Picture Worth 1,000 Words
Pictures are worth a thousand words and with that in mind, advisors and clients should look at the chart below, courtesy of Nationwide’s Mark Hackett.
Alright, so not all clients will have $2.5 million in assets and not all have or want 60/40 portfolios, but the point driven home by the chart is clear. Two percent inflation – essentially what was at play prior to 2022 – is helpful for retirement savings. Four percent is not.
“The difference between a 2% and 4% annual inflation rate starkly illustrates the potential risks of inflation on a retirement investor’s portfolio. At 2% inflation, this investor still manages to stay ahead after 20 years, but at 4% inflation, the investor is at risk of depleting this portfolio over a long retirement,” notes Hackett.
Worse yet – and this is something else Economist Twitter doesn’t want anyone to know – is the fact prices for some essential categories are rising about the overall rate of inflation, have been doing so for years and show no signs of relenting.
“Inflation rates for specific categories such as medical care, food, and shelter have risen even higher than the overall rate. But more critically for long-term investors planning for retirement, inflation in these areas has been well above the Federal Reserve’s 2% inflation target for much of the past ten years,” adds Hackett.
Amid Inflation, Advisors Matter
Advisors shouldn’t get into the business of prognosticating when inflation and interest rates will decline. Those educated guesses could leave clients disappointed.
However, the persistence of inflation confirms opportunity for advisors to add value for clients, particularly retirees and those nearing retirement.
“How can financial professionals help investors protect their retirement savings from the threat of sticky inflation? First, advise them to control their spending and review their household budgets to ensure their savings rates align with their retirement goals,” concludes Hackett. “Second, help investors stay invested through the business cycle and avoid making investment and financial decisions based on emotion. Third, guide investors to a suitable portfolio allocation that incorporates equities in a way that’s aligned with their time horizon and risk tolerance.”